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Most retired workers depend on multiple sources of income during their retirement. Two of the most common of these sources of income are social security and pensions. If we look at pension and social security income, we find significant differences. Retired workers need to understand the key differences between the two programs. They are financed, structured and taxed differently. When planning for retirement, be sure to leverage the knowledge of a financial advisor.


Approximately 44% of Americans are currently covered by a defined benefit plan through their companies. Many companies have closed defined benefit plans and today they only offer 4%. However, you are still paying benefits to Americans who are still living under these plans and are retired. They have largely been replaced by defined contribution plans, which are 401 (k) s and IRAs.

In contrast to social security, pensions are intended as old-age provision. Their purpose is to provide their retirees with a benefit large enough to live on. The benefit, of course, depends on age, years of service and salary during employment. There may be a vesting requirement. In other words, you may have to stay with the company for a period of time, sometimes five years, to get earned. The social security does not have any eligibility requirements. Spouses can receive part of the pension if the employee dies in retirement, but there are usually no benefits for underage children or dependent parents as in the social security program.

You can usually start receiving pension benefits if you retire at the age of 55. You must wait until you are at least 62 years old to start receiving social security benefits. In addition, there is no disability insurance program associated with defined benefit pensions, as is the case with the social security program. Social security pays a small death benefit, but pensions have no such function.

Some defined benefit pension plans pay out your money to you as a lump sum. You can choose whether to use the lump sum or the monthly benefit payments. You do not have this option with social security.

Social Security

Social security cards

The social security program is not a pension and was never intended to be a pension. It is a social security program administered by the US federal government. There should always be extra retirement income for employees covered by it, although we know that many Americans live almost entirely on their Social Security checks. There are two social security trust funds set up by the federal government. The social security benefits paid upon retirement come from the old-age and survivors’ fund. Survivors’ and spouse’s pensions and retirement benefits are also paid out from this fund.

The social security old-age pension is similar to a pension in many ways. It pays retirees a monthly benefit, similar to a defined benefit plan. Individuals and companies contribute to this system through a payroll tax. The amount you pay to social security is shown on your check slip in the FICA item, the Federal Income Contribution Act. Workers pay 6.2% of their wages to social security and their company pays 6.2% for them. Self-employed pay the entire 12.4%.

There are three sources of funding for social security. The first is wage tax. Social security is also financed through interest on surplus contributions from the US Treasury Department and, thirdly, taxes on benefits from current beneficiaries. The wage tax finances most of the social security fund.

The amount of social security benefits a retired worker receives depends on the number of years of service and the total salary he has received. It also depends on the age of the employee at which he starts drawing benefits. When you retire in your retirement year, you will receive your full Social Security benefit. However, if you retire between the age of 62 and your retirement year, your benefits will be reduced depending on your individual situation.

Social Security also pays a small survivor benefit if an employee dies in retirement. A widow’s or spouse’s pension can be paid, but it depends on the individual situation.

Current employees who contribute to social security fund benefits for future employees. Social security is not a claim. It’s a pay-as-you-go system.

The second part of the social security program is disability insurance. If a person is disabled and has sufficient funds, he or she may be entitled to a disability pension instead of a retirement benefit.

Main differences

Elderly Muslim couple

Elderly Muslim couple

The social security program is not a retirement plan. It is a social security plan designed to complement a retiree’s pension and savings. If an employee has paid into the social security system, they can receive benefits from retirement age. The retirement age for social security is at least 62 years. In the case of a defined benefit pension, it is usually 55 years. Sometimes you can also withdraw your pension in the form of a lump sum or receive the monthly payment. You cannot receive a flat rate for social security.

There is a vesting obligation for many pension plans, but none for social security. In the event of the death of a retired employee, the spouse can receive a reduced benefit and a small survivor’s benefit. There are no survivor benefits in a pension plan. Social insurance can grant dependent parents and dependent children a survivor benefit.

Social security is funded primarily through a payroll tax that most Americans pay. Pension plans are privately funded through a combination of corporate and employee funds. Social security has a disability income program, but pension funds do not.

Social security recipients are subject to tiered income tax based on their income. Only part of social security benefits are taxed. All pension income will be taxed at your normal tax rate, although it may not be subject to state tax. If you work after you start receiving social security, more of your social security may be taxed and at a higher rate. Pension taxation is independent of whether you are gainfully employed or not.

The taxation of a pension against social security income can vary. 37 countries do not tax social security income. If you only get one social security benefit, you probably won’t have to pay any tax on it at all. If your income is between $ 25,000 and $ 34,000, as an individual, you may be required to tax 50% of your income and 85% of your income if it is over $ 34,000. For a married couple, that income limit is $ 44,000. Pension income is simply taxed at the ordinary tax rate.

You don’t have to pay social security tax above the base wage limit, which is $ 142,800 in 2021. However, you still pay taxes on retirement income.

The bottom line

Social security and retirement income benefits should be part of a comprehensive retirement strategy. They are similar in some ways, but have important key differences, particularly in terms of funding, structure and taxation. Treat them as separate parts of an overall retirement portfolio strategy.

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Photo credits: © / Bill Oxford, © / zimmytws, © / PeopleImages

The article Pension vs. Social Security: Key Differences first appeared on the SmartAsset blog.

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